Hackett Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 27, 2020; comparative period ended March 29, 2019. Amounts are in millions of dollars unless otherwise stated. Hackett provides strategic advisory, business transformation and technology consulting, alongside software and subscription offerings.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue before reimbursements | $65.2 | $62.4 | Up 5% |
| Total revenue, including reimbursements | $69.5 | $67.2 | Reimbursements are pass-through expenses |
| Operating income | $7.7 | $8.6 | Operating margin on revenue before reimbursements: 11.8% vs. 13.8% |
| Net income | $5.5 | $7.1 | Net margin on revenue before reimbursements: 8.5% vs. 11.4% |
| Diluted EPS | $0.17 | $0.22 | Down from prior year |
| Operating cash flow | $6.5 | $6.8 | Lower year over year |
| Cash and cash equivalents | $23.3 at March 27 | $26.0 at December 27, 2019 | Quarter-end cash decreased $2.7 |
Personnel costs before reimbursable expenses rose 6% to $41.1 million and were 63.1% of revenue before reimbursements, compared with 62.4%. SG&A costs were $13.9 million, or 21.3% of that revenue, versus $14.0 million, or 22.5%. Income tax expense increased to $2.1 million from $1.4 million; the effective tax rate was 28% versus 17%, primarily reflecting a lower tax benefit from share-based compensation.
Business and balance-sheet developments
- ERP, EPM and Analytics Solutions revenue increased 20% to $33.0 million, attributed to SAP S/4HANA, Oracle Cloud ERP, OneStream and software sales activity. Strategy and Business Transformation revenue was broadly flat at $24.7 million. International revenue fell 27% to $7.5 million amid longer client decision-making in Europe.
- At March 27, 2020, total assets were $195.1 million, total liabilities $54.3 million, and shareholders’ equity $140.8 million. Current assets were $80.0 million and current liabilities $38.9 million.
- The company had no borrowings on its $45 million revolving credit facility at quarter-end. It reported compliance with its covenants and approximately $45 million of available capacity. After quarter-end, an April 3 amendment extended facility maturity to November 30, 2022, raised the rate on outstanding loans by 0.50 percentage points and set a 0.75% LIBOR floor; capacity remained $45 million.
- Financing cash outflow was $8.8 million, principally $5.8 million in dividends and $3.0 million in share repurchases. The company repurchased 73,000 shares under its plan for $1.0 million; the filing separately reports $2.0 million of share buybacks for employee tax-withholding obligations.
Outlook, risks and unusual items
- Management said COVID-19 had not significantly affected Q1 results, despite disruption in March, but expected net revenue and diluted EPS to be negatively affected in Q2 and subsequent periods until economic conditions improved. The extent and duration of the effects were described as highly uncertain.
- In response, the company limited hiring and contractor additions, curtailed travel, restricted discretionary spending and had employees work remotely. Further cost actions, impairment charges, higher doubtful-account provisions or restructuring charges could arise if disruption persisted.
- Management believed cash, borrowing availability and operating cash flows would fund working capital and capital expenditure needs for at least the next 12 months. The board deferred its next semiannual dividend decision until nearer the end of Q2 and said it could maintain, reduce, defer or suspend the dividend.
- Q1 2019 included a $1.1 million benefit from a Jibe acquisition contingent-consideration liability reduction; that liability was settled in Q4 2019. This makes the year-over-year comparison of operating costs and income less straightforward.
- Restructuring costs of $3.3 million had been recorded in 2019, primarily for staff reductions in Europe and Australia; $0.5 million remained accrued at quarter-end. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts to verify
- Whether COVID-19 caused the expected Q2 revenue and diluted-EPS declines, and how long client delays or cancellations continued.
- Whether cash collections kept pace with receivables and unbilled revenue, which rose to $53.4 million from $49.8 million at year-end.
- Whether the company maintained credit-facility covenant compliance and liquidity under the amended facility terms.
- The board’s subsequent dividend decision and any change to repurchases or other cash-preservation measures.
- Whether the strong EEA performance and weakness in international revenue persisted in later quarters.